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Foreign investors are still favouring Japanese shares

UNDETERRED by the Japanese earthquake and tsunami in March, foreign investors have kept the faith. They have now been net buyers of Japanese equities for seven consecutive months, the longest streak since records began in the 1980s, ploughing in around $60 billion while domestic institutional investors have been net sellers of some $25 billion. The purchases have propped up a market that had plummeted by a fifth immediately after the disaster.

This latest bout of foreign enthusiasm differs from earlier ones, notably in 2005-07, when overseas money sparked bull runs. The investment flow has been more steady than large. It has been targeted at certain sectors like machine tools, construction equipment and electronic parts, rather than across the board. And the money is said to be from large institutions which are cautious getting in and patient before getting out. Japan has also benefited from money that has been pulled out of the Middle East and North Africa this year. Traders say that investors from China and other Asian countries may be buying through intermediaries. There will be surprises at shareholder meetings this month as novel names appear on registers, says one asset manager.

The attraction for foreign buyers is that Japanese shares are cheap relative to other markets. “Investors are buying value, not momentum,” says one fund executive. Mark Mobius, an emerging-markets investor at Franklin Templeton, says that now is one of the best times to buy Japanese equities in many years because their price/earnings ratios are comparatively low.

Foreign investors have been unfazed by the immediate impact of the tsunami and nuclear disaster on the economy, which contracted at an annualised rate of 3.7% in the first quarter. They are pinning their hopes on a bounceback to growth in the second half of this year thanks to reconstruction spending. Many are expecting a boom in corporate profits on the back of buoyant exports.

The hopes may prove exaggerated. There have been plenty of disappointments before. One of the reasons why the Tokyo market is now cheap is that it has been such a poor performer over many years. And foreign investors made a bad move after the nuclear disaster in buying shares in TEPCO, the hapless operator of the Fukushima plant, whose shares have lost nine-tenths of their value since March.

Moreover, lots of things could go wrong with the economy and public finances. The clean-up bill has raised new fears about the government's ability to pay for it and bring Japan's big public debt under control at the same time. In recent days two credit-rating agencies, Moody's and Fitch, have given warning that Japan's debt rating may be downgraded.

Soon after the earthquake, tsunami and nuclear crisis, many foreigners (called gaijin in Japanese) fled the country. Insulted Japanese nicknamed them flyjin. Even the head of the Tokyo Stock Exchange, Atsushi Saito, heaped scorn on them. But maybe they now deserve some credit for greasing the wheels for the market recovery. Time to change their name again, to buyjin?